Rent or Sell
Hi,
I purchased a rental property 4 years ago for 72000 cash. My tenant just moved out. To date I have recouped 57000 dollars in rent (after taxes, etc). Therefore, if I make another 15000 I will have recouped my initial investment.
I am trying to decide if should sell the property at a projected price of 145000 right now or continue to rent and bring in an additional 10992 per year.
I have tried to do an NPV calculation on my own, but the math isn't making sense. Can you please help me with financial perspective?
Thanks!
Brian
Ask yourself the following: - what’s your cash on cash return right now? - can you find yield like this via any other financial instrument if you sell? - are you levered/unlevered? If unlevered, You could cash out refi and put that money to work. - if you sell the asset, where would you invest those post tax dollars and what return do you think you could get? Run that analysis for 10 years out. Then run the same analysis as if you hold the asset. As mentioned above, a 15% COC Investment is gold and would be tough to let go of unless you are considering 1031’ing into something bigger that has nearly as wonderful of a yield. There’s not shame in that route, if that’s what you’re considering, but I’m also not advocating for buying anything right now.
I think his ideal play is to refinance. Currently, his property is clipping at a 15% Yield with no debt placed onto the property. He could sell the property, but as many have said, he is unlikely to find anything worthwhile clipping a 15% Coupon. Still, with almost no experience, he found a asset that has had a 20% Annual Yield (based on babybaboon math of $14,250), so maybe he's able to source really well priced deals and can repeat this.
Given his new property value of $145,000, he could refinance is at 80% and pull out $116,000. With that money, he could buy another similar deal if he has a knack for this. If he received a 30-Year, 4.5% Loan, he would have an annual debt service of $7,053, which would leave him with $3,939 of Cash Flow and $116,000 of money to use at his discretion. Add in the fact that he can depreciate $2,618 against his initial property's cash flow, it seems like a no brainer.
Again, this all is contingent on the opportunity cost of what else he can do with that money.